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It is almost a year since Britain became the first country in the world to pass laws to end its contribution to global warming by 2050.
But as yet there is no coherent plan for how it is actually going to get there. Despite the impressive vehemence of ministerial advocates, great areas of policy remain sketchy. What technologies will replace the fossil fuels we presently rely on for so much of our energy? How much can be wrung from efficiency steps?
There is also the question of the new electricity system. Clearly there is a big role for renewable generation. But should we not be building more nuclear? And given the time involved in such projects should we not be starting in earnest pretty soon?
On nuclear, the UK is still pottering along on the piecemeal basis that it might keep the sector somehow ticking over, replacing on a like-for-like basis the 15 gigawatts of capacity that is presently on the system sometime before it is all decommissioned over the next two decades.
That is despite the need for a substantial hike in capacity to deal with the decarbonisation of transport and heating.
The Committee on Climate Change has identified a need for 150GW of new green capacity, of which it thinks some 30-60GW should be “firm power”. That requires far more than a one-for-one replacement by nuclear, assuming that the gap cannot be filled by some other non-weather dependent technology such as carbon capture and storage or long-term battery storage. The snag here is simple: no such proven technology that is commercially viable presently exists.
If more nuclear is required, as seems certain, if only as an insurance policy, a big question concerns the funding model. The UK’s first new nuclear project — at Hinkley Point in Somerset — is a by-word for extravagance. To get the private-sector owners to take on the risk of a £22bn “first of a kind” project, a strike price worth some £110 per megawatt hour at current prices was guaranteed and indexed for 35 years. (Pre the coronavirus slump, power prices were between £40-£50/MWh).
Getting that down is vital if the economy is not to be saddled with uneconomic energy. True, that means lower construction costs, but the more pressing need is actually to reduce nuclear’s cost of capital. While construction accounts for about 20 per cent of the total cost of a plant, capital amounts to close to half.
EDF, the French utility, has come up with an answer. It proposes a mechanism that would impose a form of tax on electricity consumers, requiring them to pay up front for electricity they had yet to receive. Known politely as the “regulated asset base (RAB) model”, this allows the project to avoid rolling up interest during the long construction phase, cutting the amount of compounded debt to be serviced and paid off during the life of the asset.
Applied to EDF’s proposed project at Sizewell, an identical follow-on project to Hinkley for which the planning application was announced last week, that could reduce the 9.3 per cent capital cost of Hinkley to something closer to 5 or 6 per cent.
Critics have raised concerns about this structure, such as whether it saddles consumers with risks they cannot themselves control. But a more pertinent question is whether it is really a pointless halfway house. Taxpayers and electricity consumers are essentially one and the same people. So why not substitute the complexities of the RAB with direct government finance? After all, the UK government’s cost of 30-year money is less than 1 per cent.
Granted, the reduction would not be quite as wide as those numbers imply. Capital expenditure still involves equity risk that must be funded. But state funding would bring down the electricity prices needed to service a project’s financing pretty sharply.
It would allow the UK to tender for a series of reactors from a wider range of suppliers. At present there is a danger that the only “private sector” player which can finance new nuclear projects might be CGN, a Chinese nuclear company. Meanwhile, building a series of stations in sequence would allow the creation of a deep supply chain, speeding new build and reducing construction and equipment costs.
There would, of course, be complexities, such as the need to apply cumbersome state procurement rules. But these are not insuperable. Direct state financing of construction would not mean recreating the Central Electricity Generating Board. Projects could be sold on to investors at completion if that made economic sense.
In a report published in January, engineering company Atkins, which works across the energy sector, noted that it was “entirely possible that the least cost route to net-zero will require considerably more nuclear than is currently being considered”.
As the coronavirus crisis has shown, politicians need to plan for contingencies. Britain’s economic competitiveness ultimately depends on the decisions around energy transition. With so much at stake, nuclear cannot be dropped.
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